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A case study on Special Economic Zones in India, the role played by them in the Indian economy and their impact on the same
Gaurav Pansari
Roll 065 Semester VI St. Xaviers College, Kolkata
Preface
In the new world trade environment, Indian economy is beaming like anything. With the government welcoming foreign investment, with policies designed to ease entry, location decisions, and choice of technology, production, import and export FDI is bound to increase exponentially. Investors are also attracted to India by its rich mineral and agricultural resources. The country boasts a well-established major manufacturing sector that encompasses almost all areas of activity. A policy was introduced on 1.4.2000 for setting Special Economic Zones in the country with a view to provide an internationally competitive and hassle free environment for exports. This study aims at creating awareness about the scheme of SEZ and analyzing the performance of SEZ and the impact they have actually had in the Indian economy; whether they have served the purpose for which they were formed or not? I am grateful to St. Xaviers College, Kolkata for providing me the opportunity to do the study on such recent development in the nation. I am also grateful to my project guide Prof. S. Prakash for guiding me through the course of the project. I am sincerely thankful for the guidance rendered by him. I would like to thank my family and friends for the support rendered to me during the study. The practical training I had during my internship during the graduation period helped me a lot in knowing about the intricacies of the Industry. Gaurav Pansari 2011
Table of Contents
Preface ................................................................................................................................ 2 1. 2. 3. 4. 5. 6. 7. 8. Introduction ................................................................................................................. 5 Objective of Study ....................................................................................................... 6 Methodology of Study ................................................................................................. 7 Literature Survey ......................................................................................................... 8 Introduction to SEZ ...................................................................................................... 9 Raison D'tre SEZs in India ........................................................................................ 11 About SEZs ................................................................................................................ 12 Statutory Overview Acts & Rules............................................................................ 14 8.1 8.2 9. Overview of the Special Economic Zones Act, 2005 .......................................... 14 Overview of the Special Economic Zones Rules, 2006....................................... 15
Structure & Types of SEZ ........................................................................................... 16 9.1 9.2 9.3 Persons Involved with SEZ ................................................................................. 16 Types of SEZ ....................................................................................................... 16 Parts of SEZ......................................................................................................... 17 Facilities/ Incentives available to SEZs.................................................................. 18
10.
10.1 Incentives to Units ............................................................................................. 18 10.2 Incentives to Units ............................................................................................. 18 10.3 Detail of Facilities/ Benefits to Special Economic Zones ................................... 19 11. Authorities under SEZ Act ...................................................................................... 24
11.1 Board of Approval .............................................................................................. 24 11.2 Development Commissioner.............................................................................. 25 11.3 Approval Committee .......................................................................................... 26 12. Setting up of SEZ .................................................................................................... 27
12.1 Requirements for forming SEZ ........................................................................... 27 12.2 Letter of approval & Notification ....................................................................... 29 12.3 Proposal for approval of Unit ............................................................................. 29 12.4 Letter of Approval to a unit................................................................................ 30
12.5 Conditions for Exemptions, Drawbacks and Concessions ................................. 31 12.6 Other Conditions & Compliances ....................................................................... 31 13. Developments in SEZ scheme ................................................................................ 33
13.1 Minimum Alternate Tax (MAT) Finance Bill, 2011 .......................................... 33 14. Position of SEZs in India ........................................................................................ 35
14.1 Performance so far............................................................................................. 35 14.2 SEZs in India....................................................................................................... 37 15. 16. 17. 18. 19. Criticism ................................................................................................................. 39 SWOT Analysis of SEZ Policy .................................................................................. 41 Findings & Conclusion............................................................................................ 42 Bibliography ........................................................................................................... 44 Annexures.............45
1. Introduction
The number of Special Economic Zones (SEZs) globally continues to expand. SEZs account for an increasing share of international trade flows and employ a growing number of workers world-wide. In the global economy, EPZs are viewed as an important if a second best policy instrument to promote industrialization, generate employment, and for regional development. However, costs and benefits of SEZs have generated an intense debate, touching on almost every possible aspect of SEZs. Therefore, whether SEZs are beneficial for development remains a subject of controversy. The present study tries to analyze the financial and social impact that SEZs have had on the Indian Economy. India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in 2000. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package with the minimum possible regulations. However, the new SEZ policy has triggered a wide ranging debate in India. In view of this ongoing debate, this paper is timely and will contribute to a better understanding of the financial dimensions of SEZs. It is therefore my hope that this study will help move the debate forward.
2. Objective of Study
The study aims at analysing the SEZ policy introduced in India. The project goes into details of the policy regarding the existence of SEZs both in India and abroad. It is important to know the conditions which lead to a step being taken before commenting on the same. Therefore, the reasons for implementation of the strategy have been evaluated. Along with the study of the policy, the procedure and legal compliance for formation of SEZs has also been elucidated. The further compliances to be maintained by SEZs have also been studied. Various incentives are offered by the government to SEZs to promote exports in the country. The study scrutinizes the various incentives and benefits that are availed to SEZs for inviting investors to SEZs. It has been quite some time since SEZs have started to operate in India. The data on performance of the SEZs so far has been analysed and the trend of growth in exports through SEZs reviewed. There have been criticisms faced by SEZs from all fronts; both socially and financially. SEZs have been criticised for depriving farmers of their land and causing unjustified land acquisitions. They are claimed to be used as a mode by real estate developers as an unjust means to acquire land for developing real estate projects in the non processing area of the SEZ. Another school of critics argue that SEZs are causing monetary losses to the Government through exemption and benefits given to SEZs. The project studies such arguments against SEZs. Finally, the study tries to scrutinize whether the SEZ scheme has in the end been beneficial to the Indian economy or not; whether the fiscal benefits availed to SEZs provide a return to the Indian exchequer.
3. Methodology of Study
The course of action of the study was essentially by using secondary data, analysis of information gathered by other sources and the performance reports released by the Government of India. The primary data could not be accessed due to lack of time constraint involved in the project. However, the first hand interactions with SEZ developers and authorities have been significant in the build up to the study. The experience in this regard has been instrumental in understanding the concepts regarding the structure and compliances related to SEZs in India. The copies of compliance documents have been collected through primary source. Through the study, mostly the database that was used was the Laws and statutes published by the Government of India in the Official Gazette. The Special Economic Zone Act, 2005 and the Special Economic Zones Rules, 2006, in conjunction with the amendments and notifications regarding the same, form the essence of the study. The other materials that have been accessed are the performance reports released by the Commerce and Industry Department of the Government of India. Along with official documents, reports and previous studies on the issue by other author have been referred to get an overview about the Industry and the functioning of the same. Such reports have help analyse the performance of SEZs in India and the viability of the scheme introduced by the Government. The regular publications in newspapers and magazines have helped in creating awareness about the SEZ policy. The articles in such publications helped in knowing about the developments in the SEZ environment, and the perception and opinions of Industry veterans regarding the issue.
4. Literature Survey
The SEZ policy has been a matter of debate for quite some time now. There have been contrasting opinions given on the effectiveness of the policy. However, few major studies have been done to get to the core of the claims. This is in conformity with the fact that as of now only 130 SEZs are operational, and it would take time before the SEZs are completely developed, and then their true colours show up. According to Dr. R. Shashi Kumar1, For all of Indias achievements, the country is still wrestling with high poverty and unemployment rates...there is great interest within India to promote the export-oriented manufacturing sector through Special Economic Zones or SEZs. According to Aradhna Aggarwal2, employment generation potential of zones is rather large... Zones have proven to be particularly beneficial to female employment. Zones contribution as an engine for promoting new knowledge, technologies and innovations through technology transfers and technology creation has however been quite limited till now, she adds. As per the sezindia website, the Special Economic Zones (SEZs) Policy was announced with a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, There are several limitations of the existing literature: First, in the absence of a comprehensive framework some effects are over emphasized while others are neglected. Second, the analysis is often supported by patchy evidence. Third, very few studies evaluate the effectiveness of SEZs, as an investment destination, and recovery of the costs involved in making them. Fourth, zones are not a static phenomenon. The economic conditions in which they operate change over time and affect their characteristics, an example of which would include the recent Global downturn. Finally, few academic studies are available on Special Economic Zones in India. Most of the available studies are narrow in scope and are based on procedural aspects instead of broad surveys.
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SEZs In India: Concept, Objectives And Strategies (2008); Dr. R. Shashi Kumar, Bangalore University Impact of Special Economic Zones on Employment, Poverty and Human Development (2007) by Aradhna Aggarwal. Working Papers of Indian Council for Research on International Economic Relations
5. Introduction to SEZ
Some of the earliest references of export processing zones (EPZ) date back to thirteen century in Spain. As per the ILO report, The Free Zone Consortium of Cadiz was founded in 1929. In Spain a free zone was set up before the First World War, but it took off only after the Second World War. In recent times, the first export processing zone (EPZ) was set up in 1959 at Shannon, in Ireland. These zones are known by different names such as Free Trade Zones (FTZ), Industrial Free Zone, Export Processing Zones (EPZ), Bonded Free Zones, Maquiladoras (Mexico) and Special Economic Zones (China). India was the first country to establish EPZ, at Kandla, in the Asia Pacific region in 1966. The proposal for setting up the Kandla Free Trade Zone (KAFTZ) was mooted in 1961, with the objective of facilitating the development of the Kutch region, to ensure greater utilization of Kandla Port and to create employment opportunities in the KandlaGandhidham area. With a view to create an environment for achieving rapid growth in exports, The Government of India (GoI) announced a Special Economic Zone in the Export -Import Policy 2000. Special Economic Zones (SEZs) are specifically delineated duty-free enclaves treated as a foreign territory for the purpose of industrial, service and trade operations, with exemption from customs duties and a more liberal regime in respect of other levies, foreign investment and other transactions One of the earliest and the most famous Special Economic Zones were founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city. In the late 1990s, when the then Commerce Minister of India, late Murasoli Maran, visited the special economic zones (SEZs) in China, he was motivated by the success of Chinese SEZs. Accordingly, The Government of India (GoI) first introduced the concept of SEZ in the Export -Import Policy 2000 with a view to provide an internationally competitive and hassle free environment for exports.
Murasoli Maran
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Since the performance of EPZs fell far short of expectations due to various reasons, the SEZs were conceived as a much larger and more efficient form and the EPZ scheme was replaced with the SEZ scheme. All the existing eight Export Processing Zones located at Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Maharashtra), Falta (West Bengal), Madras (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh) were converted into Special Economic Zones. Further, in order to provide a significant thrust to the policy, the government enacted the Special Economic Zones Act 2005. The Act became operative in February 2006 after the SEZ rules were framed and notified.
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7. About SEZs
What is SEZ?
Special Economic Zone is a delineated duty-free, license free, entrepreneurial friendly & environmentally conducive enclave deemed to be foreign territory dedicated to foreign trade.
What is special?
The word "Special" mainly means special economic systems and policies. That is, the central government gives SEZs special policies and flexible measures, allowing SEZs to utilize a special economic management system. Special tax incentives for foreign investments in the SEZs Greater independence on international trade activities Economic characteristics are represented as "4 primacies": Constructions primarily rely on attracting and utilizing foreign capitals; Primary economic forms are Sino-foreign joint ventures and partnerships as well as wholly foreign-owned enterprises; Products are primarily export-oriented; Economic activities are primarily driven by market. SEZs are listed separately in the national planning (including financial planning) and have province-level authority on economic administration.
Unlike most of the international instances where zones are primarily developed by Governments, the Indian SEZ policy provides for development of these zones in the government, private or joint sector. This offers equal opportunity to both Indian and international private developers. The salient features of the Special Economic Scheme include:
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No License required for import Manufacturing, trading or services activities allowed Full freedom of subcontracting
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The First Schedule The Second Schedule The third schedule Part I
Part II
Amendments to the Banking Regulation Act,1949 Amendments to the Indian Stamp Act,1899
Part III
47-52
VI VII VIII
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3 4
Section 2(g) of SEZ Act, 2005 infrastructure means facilities needed for development, operation and maintenance of a Special Economic Zone and includes industrial, business and social amenities like development of land, roads, buildings, sewerage and effluent treatment facilities, solid waste management facilities, port, including jetties, single point moorings, storage tanks and interconnecting pipelines for liquids and gases, Inland Container Depot or Container Freight Station, warehouses, airports, railways, transport system, generation and distribution of power, gas and other forms of energy, telecommunication, data transmission network, information technology network, hospitals, hotels, educational institutions, leisure, recreational and entertainment facilities, residential and business complex, water supply, including desalination plant, sanitation facility; 5 Sector means one or more products or one or more services falling under a category such as engineering, textiles and garments, pharmaceuticals and chemicals, handicrafts, gem and jewellery, electronics hardware and software, including information technology enabled services and biotechnology;
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SEZ in a port or airport means a SEZ in an existing port or airport for manufacture of goods in two or more goods in sector or goods falling in two or more sectors or for trading and warehousing or rendering of services. Free Trade and Warehousing Zone means a Special Economic Zone wherein mainly trading and warehousing and other activities related thereto are carried on. The Free Trade & Warehousing Zones (FT & WZ) is a special category of Special Economic Zones with a focus on trading and warehousing. This scheme aims at creation of world class infrastructure for warehousing to bolster the integrated zones as international trading hubs.
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The exemption from Minimum Alternate Tax has been withdrawn from SEZs in the Finance Bill, 2011.
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Exemption from dividend distribution tax under Section 115O of the Income Tax Act. Exemption from Central Sales Tax (CST). Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).
Special Economic Zones 13. The Coal Mines (Conservation and Development Act, 1974 (28 of 1974). 14. The Oil Industry (Development) Act, 1974 (47 of 1974). 15. The Tobacco Cess Act, 1975 (26 of 1975).
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16. The Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978). 17. The Sugar Cess Act, 1982 (3 of 1982). 18. The Jute Manufactures Cess Act, 1983 (28 of 1983). 19. The Agricultural and Processed Food Products Export Cess Act, 1985 (3 of 1986). 20. The Spices Cess Act, 1986 (11 of 1986). 21. The Research and Development Cess Act, 1986 (32 of 1986).
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SERVICE TAX o exemption from service tax under Chapter-V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone; CENTRAL SALES TAX o Every Developer and the entrepreneur is entitled exemption from the levy of taxes on the sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956 if such goods are meant to carry on the authorized operations by the Developer or entrepreneur. SECURITIES TRANSACTION TAX o Securities Transaction Tax means tax leviable on taxable securities transaction. Every Developer and the entrepreneur shall be entitled to exemption from the securities transaction tax leviable under section 98 of the Finance (No. 2) Act, 2004 in case the taxable securities transactions are entered into by a non-resident through the International Financial Services Centre. STAMP DUTY o Proviso (3) to Section 3 of Indian Stamp Act, 1899 has been inserted vide Special Economic Zones Act 2005 Third Schedule Part III. PROVIDED that no duty shall be chargeable in respect of- (3) Any instrument executed, by, or, on behalf of, or, in favour of the Developer, or Unit or in connection with the carrying out of purposes of the Special Economic Zone. INCOME TAX o Exemption To New Units In SEZ - Sec 10 AA of Income Tax Act, 1961 provides for exemption to newly established units in Special economic zones on or after 01.04.2005. 100% of Profits from export will be available for 5 consecutive years and 50% of Profits from exports for further 5 assessment years. For eleventh to fifteenth assessment year deduction of 50% of Profits for as credited to Special Economic Zone Re-investment Reserve Account will be available. This Special reserve can be utilized for Acquiring machinery or plant within three years. o Exemption to Developer of Special Economic Zones - Exemption to developer of Special Economic Zones will be available under Sec 80- IAB of the Income Tax Act in respect of developers of SEZ notified on or after 01.04.2005. A deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years will be available. The assessee has the option of claiming the said deduction for any 10 consecutive assessment years out of 15 years beginning from the year in which a SEZ has been notified by the Central Government
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o Exemption from Dividend distribution tax - Sec 111-O (6) provides that no tax on dividends would be chargeable in respect of the total income of an undertaking or enterprise engaged in: a) developing a SEZ, b) developing and operating a SEZ or c) developing, operating and maintaining a SEZ o Exemption from Capital Gains- Capital gains arising on transfer of assets (machinery, plant, building, land or any rights in buildings or land) on shifting of the industrial undertaking from an urban area to any SEZ would be exempt from capital gains tax. The exemption would be allowable if within one year before or three years after such transfer. FOREIGN DIRECT INVESTMENTS o 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route, except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes. No cap of foreign investments for SSI reserved items. OFF-SHORE BANKING UNITS (OBUS) o Setting up of OBUs allowed in SEZs. o OBUS are entitled for 100% income tax exemption for 3 years and 50% for next 2 years. BANKING / EXTERNAL COMMERCIAL BORROWINGS (ECBS) o ECBs by units up to US$ 500 million a year allowed without any maturity restrictions. o Freedom to bring in export proceeds without any time limit. o Flexibility to keep 100% of export proceeds in EEFC account and freedom to make overseas payment from such account. o Exemption from interest rate surcharge on import finance. o SEZ units allowed to write-off unrealized export bills. o Exemption from interest rate surcharge on import finance. EXEMPTIONS IN MATTERS RELATED TO ENVIRONMENT o SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non-polluting service industries in the Coastal Regulation Zone area. o SEZ units are exempted from public hearing under Environment Impact Assessment Notification. COMPANIES ACT o Enhanced limit of INR 2.4 crores per annum is allowed for managerial remuneration. o Agreement to opening of Regional office of Registrar of Companies in SEZ.
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o Exemption from requirement of domicile in India for 12 months prior to appointment as Director. DRUGS AND COSMETICS o Exemption from port restriction under Drugs & Cosmetics Rules. o Sub-Contracting / Contract Farming. o SEZ units may sub-contract part of production or production process through units in the Domestic Tariff Area or through other EOU / SEZ units. o SEZ units may also sub-contract part of their production process abroad.
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(including investments by a person resident outside India), in the Special Economic Zones for its development, operation and maintenance; Granting of approval or rejecting of proposal for providing infrastructure facilities in a Special Economic Zone or modifying such proposals; Granting, notwithstanding anything contained in the Industries (Development and Regulation) Act, 1951, a license to an industrial undertaking if such undertaking is established, as a whole or part thereof, or proposed to be established, in a Special Economic Zones; Suspension of the letter of approval granted to a Developer and appointment of an Administrator Disposing of appeals Performing such other functions as may be assigned to it by the Central Government.
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Sec 11 of Special Economic Zones Act, 2005 Sec 12(1) of Special Economic Zone Act, 2005
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Discharge such other functions as may be assigned to him by the Central Government under this Act or any other law for the time being in force; and Discharge such other functions as may be delegated to him by the Board.
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1 2
Multi Product Specific Sector/ Multi Service Electronic Hardware and Software Handicrafts Bio Technology/Non conventional energy Gems and Jewellery Sector Free Trade and warehousing Zone
3 4 5 6 7
Built up processing area of 1 lakh sq mtr 50% Built up processing area of 40000 sq mtr. Built up processing area of 50000 sq mtr. Built up processing area of 1 lakh sq mtr
The maximum area of an SEZ is allowed to be 5000 hectares. However, the Central Government may consider on merit the clubbing of contiguous existing notified Special Economic Zones notwithstanding that the total area of resultant Special Economic Zone exceeds 5000 hectares.
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Specific States mean Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir, Goa or a Union Territory.
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The Central Government, while notifying any area as a Special Economic Zone or an additional area to be included in the Special Economic Zone and discharging its functions under this Act, shall be guided by the following: Generation of additional economic activity Promotion of exports of goods and services; Promotion of investment from domestic and foreign sources; Creation of employment opportunities; Development of infrastructure facilities; and Maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States.
In case of a Special Economic Zone relating to information technology, the following facilities shall be ensured, namely: Twenty-four hours uninterrupted power supply at stable frequency in the Zone Reliable connectivity for uninterrupted and secure data transmission Provision for central air-conditioning system A ready to use, furnished plug and pay facility for end users.
Developer should have legal possession and irrevocable rights to develop the said area as SEZ and area should be free from all encumbrances. Where the Developer has leasehold rights over the identified area, the lease shall be for a period not less than twenty years. The identified area shall be contiguous and vacant and it shall have no public thoroughfare. A Developer was earlier permitted to allot land in the nonprocessing area for business and social purposes. The SEZ Amendment Rules have amended the above condition to the effect that no vacant land in the non processing area shall be leased for business and social purposes to any person except a Codeveloper approved by the Board. Further, it has been provided that a Developer or Codeveloper may lease completed infrastructure along with vacant land appurtenant thereto. The Developer or Co-Developer shall have at least 26% of the equity in the entity proposing to create business, residential or recreational facilities in a Special Economic Zone in case such development is proposed to be carried out through a separate entity or a special purpose vehicle being a company formed and registered under the Companies Act, 1956.
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Inputs mean raw materials, intermediates, components, consumables, parts and packing materials;
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shall be valid for five years (which maybe extended for another five years at a time by the Development Commissioner) from the date of commencement of production or service activity and it shall be construed as a license for all purposes related to authorized operations
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Import of duty free material for setting up any facility in the non-processing area of the SEZ shall be as approved by the Board and import of no duty free material shall be permitted for operation and maintenance of such facilities A return of Defective goods to DTA can be allowed only on refund of the export entitlement The Unit shall account for the entire quantity of goods imported or procured duty free. However, at no point of time the Unit shall be required to co-relate every import consignment with its export or transfer or sales in DTA or supply to bonded warehouses and goods held as stock. If the goods admitted are utilized for purposes other than for the authorized operations or if the Unit or Developer fails to account for the goods as provided under these rules, duty shall be chargeable on such goods as if these goods have been cleared for home consumption. Sale in DTA o On payment of Customs duties o Bill of Entry for home consumption along with invoice and packing list filed with the Authorized Officers o Surplus power generated in the SEZ may be sold in the DTA on payment of duty on raw materials o Duty on used capital goods levied on the depreciated value o Temporarily removals may be allowed for certain specified goods or with prior approval of Authorised officer without payment of duty
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units. Changing the rules of the game for developers or units who have already committed funds upsets the financial calculations that guided the investment decision. It is another matter if the government makes it clear that newcomers will be subject to taxes. MAT will also be applicable to the developer of Special Economic Zone (SEZ) as well as the units located in the SEZ. Currently, SEZ developers and units are exempt from levy of MAT under Section 115 JB of the Income Tax Act. MAT will be levied at 18.5% of adjusted book profits of SEZ developers and SEZ units if tax computed under normal provisions is less than 18.5% of adjusted book profits. Also, dividend distributed by the SEZ developer on or after 1 June 2011 will be subject to Dividend Distribution Tax (DDT). Such dividend will be exempt from tax in the hands of the recipient shareholders12. But withdrawing concessions for parties who have already committed funds undermines credibility of the government and imposes unforeseen costs on the investors. The change in exemption rules has brought criticisms from all corners of the industry. Till today, it was zero. Suddenly, out of the blue, tax of 20-21% is being imposed on you, commerce secretary Rahul Khullar pointed out, ...if the MAT (minimum alternate tax) ends up altogether discouraging both foreign and domestic investments, what are we achieving? he asked. While taxes of 20-21% on profits may not hurt big software companies, they will make life hard for manufacturing companies who have to deal with Chinese competitors who often pay much lower taxes and bills, Chintan Patel (head for the real estate, industrial and hospitality advisory services of Ernst & Young), said. It is quite clear that the move has not been welcomed by the industry, which apart from a vent in the trust of developers in the government, may also play a role in reducing the positive impact of SEZs on the economy, and even beating the purpose for their formation.
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Budget 2011 India Impact and Reaction of Real Estate Industry; budget 2011 analysis by Tej kohli foundation
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As per the website of SEZ: sezindia.nic.in. However, 374 SEZs have been notified as on February 17, 2011, while approval granted for 582 proposals. 14 Data as on 30.6.2008. Source: earlier record from sezindia.nic.in 15 The Hindu, New Delhi, March 7, 2011 edition 16 Source: http://sezindia.nic.in
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100,000 25%
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Sectors IT/ITES/Electronic Hardware/Semiconductor Pharma/chemicals Bio-tech Engineering Multi-Product Textiles/Apparel/Wool Multi-Services/Services FTWZ Gems and Jewellery Others GRAND TOTAL
Formal Approval
IT/ITES 19% 3% 4% 4% 4% 6% 60% Bio-tech Multi-Product Pharma Engineering Textiles Others 3% 4% 4% 5% 6% 16%
Notified SEZs
IT/ITES Pharma Bio-tech Engineering 62% Multi-Product Textiles Others
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Source: sezindia.nic.in
Special Economic Zones The details of the SEZs in India, in various States of India are as follows:
State Andhra Pradesh Chandigarh Chhattisgarh Delhi Dadra & Nagar Haveli Goa Gujarat Haryana Himachal Pradesh Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Nagaland Orissa Pondicherry Punjab Rajasthan Tamil Nadu Uttar Pradesh Uttarakhand West Bengal Grand Total Formal 109 2 2 3 4 7 45 45 0 1 57 28 14 104 2 11 1 8 10 70 33 3 22 581 In-principle 5 0 2 0 0 0 13 17 3 0 9 0 7 38 0 3 1 7 11 19 5 0 14 154
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Formal Approvals
21% 44% 6% 29% North East West South
Notified SEZs
23% North 36% East West 35% 6% South
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15. Criticism
Land Acquisition
Land, especially agricultural land is a very sensitive issue in India. There are millions of people whose livelihood depends on agricultural land. But the introduction of SEZ in India has resulted in the dispossession of agricultural land and has affected the livelihood of farmer at large. In against of this, farmers first protested to safeguard their interests through litigation and court cases challenging the establishment of SEZs. But later on, the resistance against SEZ in India became massive when political parties also joined the farmers. The biggest challenges faced by SEZs in todays scenario are the taking away of agricultural land from the farmers. The farmers are allegedly being paid disproportionate money which is not in lieu of the current land prices. It could be seen in the case of farmers from Kalinganagar in Orissa where the money given was disproportionate to as high as 1:10 with respect to the market rates. Few examples of incidences relating to SEZs are cited below: Jamnagar Incidence - In November 2006, farmers from the Jamnagar District in Gujarat moved the High Court of Gujarat and later to the Supreme Court in order to challenge the setting-up of a 10,000-acre (approx. 4,000-ha) SEZ by Reliance Infrastructure. They claimed that the acquisition was in breach of the public interest. Nandigram Violence - Nandigram is a rural area in state of West Bengal. In 2007 the West Bengal government decided to allow Salim Group to set up a chemical hub at Nandigram under the SEZ policy. So, allegedly, more than 3,000 heavily armed police stormed the Nandigram area. The main objective was to remove the protestors who were against it in order to expropriate 10,000 acres of land for the SEZ. In light of above, the Centre has directed the states that mainly waste and barren land and if necessary single crop agricultural land alone should be acquired for the SEZ. It has been further clarified that if perforce a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, the same should not exceed 10% of the total land required for the SEZs.
Misuse of Land
Misuse of land while creating infrastructure in the non-processing area, such as housing, commercial and shopping complexes etc., is often termed as an argument against SEZs. The concept of developing a non-processing area in SEZs is to provide
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support facilities to the SEZ processing area and the employees working therein. The authorised activities are to ensure that world class infrastructure is set up to facilitate the operation of manufacturing and service units in the SEZ. The scheme envisages that the SEZ Developer would be responsible for providing all civic amenities and infrastructure including roads, sewerage systems, open spaces, green spaces, education facilities, power, water supply and housing etc. Only those authorized operations that are approved by the Board of Approval would be eligible for tax exemptions. In order to regulate usage of SEZ area by the developers, precautions have been taken by way of assessing the size requirement of infrastructural facilities like housing, commercial spaces, recreational amenities etc. based on the employment generation potential of the SEZ and granting approvals by the Board of Approvals.
Fresh Investment
Another area of concern often cited was on shifting of domestic industries into SEZs. The objective of the Special Economic Zone Policy being generation of fresh investment and employment, conversion of any DTA unit or even 100% EOU or STPI unit is not allowed. In order to ensure that such conversions do not occur, the SEZ Act and Rules stipulate that SEZs can be set up only on vacant land. Further, the use of second hand capital goods from the DTA has also been made in line with the provisions of the 10AA of the Income Tax Act, which allows only 20% of used plant and machinery. Studies on SEZs have revealed the fact that there is no evidence to support the view that such relocation of units from other schemes or DTA to SEZs is actually happening.
Financial Losses
That the Government would be incurring tax losses on account of the direct and indirect tax incentives being given to SEZs is yet another apprehension expressed from time to time. However according to the GoI, evidence of employment and investment generated by the private sector SEZs show that in the long run, the benefits accrued from SEZs would far outweigh the tax losses to the Government which are notional in nature. Since there are duty remissions provided for all exports and tax exemptions are available for infrastructural projects outside the SEZ, the loss of revenue cannot be attributed to only due to the fiscal incentives given under the SEZ Scheme. Unless suitable incentives are given, no developer would come forward to invest in such mega projects without any return. In any event, the direct and indirect tax income accruing to the Central/State Governments in times to come due to the increased economic activities in the SEZs and the surrounding areas would be far higher than the estimated tax loss
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Weaknesses
Infrastructure bottlenecks connecting infrastructure like Roads leading to SEZs. Inadequate institutional support Political changes Red Tape Inappropriate locations Long gestation period 4 to 5 years in absence of infrastructure development. Social bottlenecks resistance from local people and land owners in developing SEZs
Opportunities
To use SEZs to catalyze infrastructure development. New small ports & airports are also being developed keeping SEZ concept in mind. Lower the high transaction /behind the border costs to exporters. To increase investments in core strength areas like IT and software products and services. An alternative manufacturing base particularly compared to Chinese SEZs.
Threats
Loosing edge of low labour costsmany countries are competing. With relocations of industries in other third world countries, new competitors will emerge. Prospect of even more restrictive labour laws being introduced. Formation of economic blocks Fluctuation in international economy may lead to drop in exports.
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Panel to discuss removal of tax sops for SEZs, Business Line Article (2008). (Data for 2010 has been updated in the same)
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Such duty was paid 3-4 years ago, and the applications for the same are hovering in the red tape hierarchy in government offices. The potential of SEZs cannot be questioned. They have already proved their worth especially in countries like China. The question remains is that of management and prevention of misuse of the policy, through integrated authority and control over the functioning of SEZs.
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18. Bibliography
The Special Economic Zones Act, 2005; Government of India, Ministry Of Commerce And Industry, Published in the Gazette of India The Special Economic Zones Rules, 2006; Government of India, Ministry Of Commerce And Industry, Published in the Gazette of India Extraordinary Amendments to the Special Economic Zones Rules, 2006; Government of India, Ministry Of Commerce And Industry, Published in the Gazette of India Extraordinary Instructions issued by the Department of Commerce (SEZ Division) Information available on official website of SEZs sezindia.nic.in Impact of Special Economic Zones on Employment, Poverty and Human Development (2007), Aradhna Aggarwal. Working Papers of Indian Council for Research on International Economic Relations A Handbook on Special Economic Zones (2007), The Institute of Chartered Accountants of India The Hindu Newspaper, New Delhi; March 7, 2011 edition The website www.infodriveindia.com/exim Developing Private SEZs in India (2005); Sreekumar Chatra, PricewaterhouseCoopers SEZs In India: Concept, Objectives And Strategies (2008); Dr. R. Shashi Kumar, Bangalore University Budget 2011 India Impact and Reaction of Real Estate Industry; Budget 2011 Analysis by Tej kohli foundation SEZ (Special Economic Zone) - An Overview, Challenges and Future; Neeraj Mishra (2008)
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Annexures